The S&P 500, for instance, has a beta of 1.0, while General Mills, one of the few stocks to eke out a gain on Sept. 22, when U.S. markets fell more than 4 percent, has a beta of just 0.22. Low-beta stocks tend to be established, blue-chip companies with the market leadership and steady cash flow to weather economic downturns.
Low-beta stocks tend to produce smoother returns and better downside resistance during difficult markets, according to a 2008 study by the Schwab Center for Financial Research. While having a low beta doesn’t protect against losses, Schwab found it to be a valuable tool in helping investors gauge the expected risk of individual stocks and stock portfolios.
Wall Street appears to be giving more credence to beta. The first exchange traded fund (ETF) Goldman Sachs plans to roll out will focus on lower beta stocks, according to paperwork filed last month with the Securities and Exchange Commission.
An existing ETFthat targets low beta stocks is the PowerShares S&P 500 Low Volatility Portfolio. Owning the 100 stocks in the index with the lowest trailing volatility has enabled the ETF to outperform the overall index since its May 5 inception: losing just less than 6 percent, compared to a loss of 15 percent for the index.
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